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Fixed or Variable Rate – How to Choose

To fix or not to fix is the decision every home buyer has to make. There is no right or
wrong answer to this question, however, there are some hints for you to take into
account before you make the wisest decision.

Fixed rate home loans
When your loan is set unchanged for a period of time, e.g. 1 year, 5 year, etc. you
are having a fixed rate home loan.


The main advantage of fixed rate loans is that the interest rate rise won’t affect your
loan repayment, and it provides you the certainty of cashflow for a period of time so
it’s easier for your budget.


However, there are some disadvantages with fixed loans as well.


Firstly, just like an interest rise doesn’t affect your repayment, an interest drop
doesn’t apply to you either, which means you won’t benefit from the rate drop as the
variable rate loans do.


Secondly, there are normally limitations on extra loan repayment and redraw
facilities during the fixed rate period, so you are losing the flexibility of paying off your
mortgage earlier and having no access to extra funds in your account.


Also, you will be charged by the bank if you are to change or pay off within the fixed
term, and it could be expensive.


Variable rate home loans
If you don’t fix your home loan, the interest rate of your loan will vary with the
changes of market rates, hence there is less certainty of your loan repayments
compared to the fixed rates. It might be harder for your budget with a variable rate
home loan, and a bit risky if you don’t have enough cash buffer for future interest
rate rises.


However, opposite to a fixed rate loan, you can enjoy the benefit of interest decrease
with a variable loan, having the choice of putting extra repayment to your mortgage
to pay off your loan early, and being provided with the redraw and offset account
facilities. It is generally cheaper with a variable rate loan to switch to other loan
products.


Loan splitting
Another common option is to split your loan, for instance, to half variable and half
fixed rates, to enjoy the benefits and minimise the disadvantages and risks from both
sides.

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